I haven’t been the highest bidder on most of the houses that I’ve bought. As a matter of fact, on the last house the highest bid was $170,000 higher than mine. I walked away with the contract.
I don’t have any magic pill or any mind control skills that make me more persuasive. I didn’t have any blackmail material against the seller’s agent, either. All I had in my arsenal was the proper training required to get the bid. In my experience, this is one thing that most people don’t have any training in. We go to seminars and they tell us to make “good” bids, but don’t tell us exactly what that means.
I’m going to walk you through my mindset throughout the process of trying to win the bid on a property and try to give you some insight into the strategies I use during in a competitive bidder environment.
First, realize that the asking price is not relevant. You aren’t bidding against the homeowner, you are bidding against the other investors. If the asking price is way too high, are you going to raise your offer so that you lose money just to get the house? Of course not. It really isn’t even a starting point. The starting point is the ARV (After Repair Value) of the house. You start there and work backwards.
Secondly, get real good at figuring out and understanding the ARV. If you don’t have a solid feel on the ARV then you can’t know what would constitute a proper bid on the house. Get good at it. Follow houses that you want and, if you don’t get it, follow the house on Redfin and find out what it sold for. If your ARV was close, then you are doing it right. If it was off by a substantial amount, then you should probably go back and find out why. If the seller is selling at $300,000 but the ARV is high enough to warrant a bid of $350,000 then you need to bid $350,000. Other investors will and they will make money by bidding appropriately.
Third, you need to set personal maximum bid amount that you’re willing to offer for the house and NEVER go over that number. Remember, this is a business and we operate from facts and figures, not emotions. How, you ask, does this help us “win” in a bidding war? Look at it this way, if you offered more than you should have on a house just to get the “win”, and then it doesn’t perform, you lose money. You lost that money because you made the “winning” part more important than the “business” part. By only offering proper bids, bids that make sense for your bottom line, then you “win” the bidding war. If you don’t get the house and someone else does on an offer that is too high, THEY will probably lose money. Don’t be emotionally invested in the property and overbid.
Lastly, show the seller that you are serious about buying the house. Cash offers help, but every investor has a cash offer. What are the other terms that investors offer that you can one-up them on? Depending on the value of the house, you can offer a higher earnest money deposit (EMD). On my latest bid, everyone else was offering about $20,000. My partner and I wrote a check for $50,000 to show that we were serious. Increase your EMD if you can. Second, in California the standard contract has a 17-day period to back out. Most investors leave it at 17, or increase it to 30 if they don’t have the money already lined up. I have partners and money lined up ahead of time, so I typically shorten it to 14 days. On this latest one, I shortened it to 10 days because I used part of the negotiation time to get my designer in there to look at the house. This way, I had a better idea of what needed to be done.
I’ve talked about taking that box that others live in and throwing it away. Think outside of the box to make your offer more attractive and you will have a more favorable response. The highest offer was 15% higher than mine, yet my terms were better. The seller was more comfortable with us and was more confident that we could perform. This factor is especially helpful if you know that the seller had an accepted offer fall out of escrow. They are already a bit gun-shy and need more reassurances that you can do what you say you will do. Find the small ways to set you apart from the other guys.
Just like most things in this business, it is 80% science and 20% art. You have to learn the 80% science and use it diligently on every project. With time and practice, you will be winning the right bids and not winning the losing bids. Remember: The winner of a house bidding is not necessarily the person who buys the house.
If anyone has more questions or wants more one-on-one coaching, don’t hesitate to contact me. This is a passion for me and I truly enjoy sharing what I know with others. Thanks for coming by and getting a bit of the education. Until then, remember that you, too, have that inner warrior that it takes to achieve greatness and success. Feel free to drop me a line at Coaching[at] BaileProperties.com.
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